Oil Rout Not Due To Slowing Economies

Most seem convinced that globe is awash in oil (United States Oil Fund LP (ETF) (NYSEARCA:USO)). That this is due to US fracking techniques. This article shows the disconnect from reality in oil thinking.

US has gradually developed fracking since early 2000s first with gas since 2005 and then with oil 2009. Gradually production has improved by 3mil bbl/day. 3mil bbl/day did not just show up over night. Global consumption is still growing over 600,000bbl/day and is pegged at ~92mil bbl/day currently.

What we are seeing is Hedge Funds dumping large oil bets due to a stronger US$ which has made the hyperinflation trade of 2010-2012 not only worthless, but threatens to cause some HFs to fail . The oil positions were like a dominos set to knock each other down, but no one thought it could go any direction by higher due to Fed and Central Bank excess liquidity. Once Russia invaded Crimea/Ukraine, capital from Russia became very uneasy and began to flood Western markets-the U$ strengthened unexpectedly. US$ began to tilt the oil trade negative in May 2014 and the route began.

What we see today is a panic by HFs trying to unwind positions thought to only have profits. This thinking drew in many to illiquid positions with substantial margin or leverage using derivatives, some larger firms went so far as to build their own oil and commodity storage facilities.

This panic will end. How low oil will trade is entirely dependent on how quickly positions are liquidated. No one can predict this, but oil will stabilize, very likely in the mid-$90s would be my guess. The rout in oil prices is almost played out and should be over shortly, a few weeks at most.

The interpretation that falling oil prices means economies are slowing has no support from economic trends. Economic trends remain intact and indicate global economic expansion is continuing.